List of References
Gali, J., J. López-Salido, and J. Vallés, 2002, “Technology Shocks and Monetary Policy: Assessing the Fed’s Performance,” NBER Working Paper No. 8768, February.
Kuttner, K., and P. Moser, 2002, “The Monetary Transmission Mechanism: Some Answers and Further Questions,” Federal Reserve Bank of New York mimeo, January.
Sellon, G., 2002, “The Changing U.S. Financial System: Some Implications for the Monetary Transmission Mechanism,” Federal Reserve Bank of Kansas City Economic Review, First Quarter, pp. 5-35.
Taylor, J., 1993, “Discretion Versus Policy Rules in Practice,” Carnegie-Rochester Conference Series on Public Policy, Vol. 39, p. 195-214.
Taylor, J., 1995, “The Monetary Transmission Mechanism: An Empirical Framework,” Journal of Economic Perspectives, Autumn, pp. 11-26.
Taylor, J., 1999, “The Monetary Transmission Mechanism and the Evaluation of Monetary Policy Rules” Stanford University mimeo, September.
Prepared by Phillip Swagel.
This is based on the results of the “just-identified” model displayed in Bernanke and Mihov (1998, p. 893). In this framework, the growth rate returns to the baseline while the level of GDP is permanently changed, since the identification scheme does not impose long-run restrictions such as super-neutrality of money. The April 2002 World Economic Outlook contains an analysis of the effects of monetary policy using a related framework.
The results are obtained by applying the level effects to the sequence of interest rate cuts, with the impact on output equal to the cumulative effect of past interest rate changes. For the purpose of this exercise, the federal funds rate is assumed to rise gradually starting in the third quarter of 2002 to 5½ percent by the end of 2003.
These results must be interpreted with caution, as the simulations are based on the impulse-response function estimated by Bernanke and Mihov, and do not take into account the endogenous response of interest rates to output related to the policy-response function assumed in their estimation framework.
Note that unlike impulse responses described above, the correlations do not imply causality or the magnitude of the relationship between interest rates and output. Kumar and Sgherri (2002) offer estimates of these latter effects for the United States and other G-7 countries.
In results not shown, essentially no pattern is found in the correlations between interest rates and leads and lags of changes in business inventories.
A Taylor rule indicates the appropriate level of the federal funds rate for a combination of GDP growth, potential GDP growth, and inflation. The rule used here is:
The index is constructed along the lines of the Goldman Sachs index, and includes the real three-month LIBOR interest rate with a weight of 0.35, the real yield on A-rated corporate bonds with a weight of 0.55, the real exchange value of the dollar with a weight of 0.05, and the ratio of stock-market capitalization to GDP (the sum of the NYSE and Nasdaq) with a weight of 0.05. These are each measured relative to the average values over the period 1987 to 1995, a period for which the value of the index is set to 100.
For example, neither the residuals from the Taylor equation nor the level of the FCI were significantly correlated with GDP growth, especially during the 1984-2001 period. Simple vector auto regressions also did not demonstrate a significant relationship between the FCI and GDP growth.